Ponzi and pyramid schemes are closely related because they both involve paying longer-standing members with money from new participants, instead of actual profits from investing or selling products to the public. Here are some common differences:
-The typical hook: for a pyramid scheme, the hook is a promise you will earn high profits by making one payment and then finding a set number of people to become distributors of a product. The scheme typically does not involve a genuine product. The purported product may not exist or it may only be "sold" within the pyramid scheme. For a Ponzi scheme, the hook is a promise of earning high investment returns with little or no risk by simply handing over your money; the investment typically does not exist.
-The ways to supposedly profit are different. In a pyramid scheme, you must recruit new distributors to receive payments, in a Ponzi scheme, no recruiting is necessary to receive payments.
-Interaction with person who runs the scheme: In a pyramid scheme, there is sometimes no interaction, since new participants come to the scheme at different levels. For a Ponzi scheme, the promoter generally acts directly with all participants.
-Source of payments. It is always disclosed in a pyramid scheme that the source of payments comes from new participants. In a Ponzi scheme, new participants are also the source of payments, but this is never disclosed.
-Collapse. For a pyramid scheme, the collapse is fast. For a Ponzi scheme, it may be relatively slow, especially if existing participants are re-investing their money.